Kevin Hassett, director of the National Economic Council, is seen by prediction markets as the frontrunner to replace Federal Reserve Chair Jerome Powell.
Bonds have long served as a stabilizing force for investors, offering diversification and protection in periods of equity volatility. But that role could come under threat — however unlikely — if President Donald Trump selects his top White House economist, Kevin Hassett, to lead the Federal Reserve.
Lawrence Gillum, chief fixed-income strategist at Charlotte-based brokerage LPL Financial, warns that a Fed under Hassett might prioritize economic growth over price stability. Such a shift could unanchor inflation expectations and undermine the usefulness of bonds within diversified portfolios. Gillum describes this as a “non-base case,” but one that deserves attention.
“We believe inflation will ultimately return to 2% and that the Fed will remain a credible institution,” Gillum said in a phone interview Tuesday. “For now, rate markets seem comfortable with the prospect of a Hassett appointment. But if markets sense that policy is tilting more toward growth at the expense of inflation control, it would put bonds in a difficult position.”
Bonds’ traditional role under pressure
For decades, bonds have balanced equity volatility during periods of market stress, forming the defensive anchor of the classic 60/40 portfolio used by moderate-risk investors.
But that stability depends on a low-inflation backdrop and a central bank committed to price stability. Rising inflation erodes the real value of bonds’ fixed cash flows, while a central bank more focused on boosting growth tends to keep rates lower for longer than economic conditions justify.
Investors saw these dynamics firsthand in 2022, when both stocks and bonds fell sharply. It marked one of the worst years in history for the traditional 60/40 mix, and the usual negative correlation between the two asset classes has struggled to re-establish itself since.
Hassett emerges as Trump’s likely pick
Over the weekend, Trump said he knows whom he will select to lead the Federal Reserve but declined to reveal whether that person is Hassett, who currently heads the National Economic Council.
Prediction markets such as Kalshi and Polymarket have assigned at least an 80% probability to Hassett becoming Trump’s choice, as of Tuesday. In a CBS “Face the Nation” interview aired Sunday, Hassett said he was proud to be considered but denied a Bloomberg report describing him as the clear favorite.
Hassett’s public comments suggest he strongly favors deeper rate cuts. In November, he told Fox News that if he were Fed chair, he “would be cutting rates right now.” Last month, at a Washington Economic Club event, he advocated a 50-basis-point cut and agreed with Trump that interest rates could be “much lower.”
A calm market — for now
So far, markets have reacted calmly to the possibility of Hassett taking over the Fed. Market-based inflation expectations have risen only slightly since Sunday, and the Treasury yield curve has steepened only modestly — signaling limited investor concern at this stage.
Gillum said he is watching the five-year breakeven inflation rate — a measure of expected inflation over the next five years — which stood around 2.3% on Tuesday. But he warned that if it rises meaningfully toward 3%, with incremental moves toward 2.5% and 2.7% over several weeks, it would become “a problem.” Much will depend, he said, on whether Hassett would be “determined to cut rates regardless of inflation.”
Gillum added that the larger risk is a break from past Fed norms: “If Hassett’s appointment signals a shift toward prioritizing the growth mandate over price stability, then bonds fall apart.” Still, he noted, “It’s a warning signal, not something we expect to happen — at least not immediately.”
Recent market performance
On Tuesday, trading in the bond market was relatively subdued, with most Treasury yields little changed — except for one-month and two-month bill yields, which fell 7 and 10 basis points respectively to 3.84% and 3.75%, as traders increased bets on another rate cut next week and again in January.
Major equity benchmarks — the Dow Jones, S&P 500, and Nasdaq — all closed higher.
